Updated 01 June 2020
A fixed term annuity can offer you both the security of a regular retirement income and the flexibility to invest in a different product later.
If you like the idea of a regular income in retirement, but also the flexibility to change your mind later, a fixed term annuity could be a good option. Sometimes called short-term annuities, these products last from anything between one to 20 years, though five to ten years is typical.
Unlike a standard annuity, a fixed-term annuity means you’re not tied in for the rest of your life, so you can reassess your options when it comes to an end.
A fixed term annuity is an insurance product that pays you a guaranteed income for a set amount of time, followed by a lump sum (a ‘maturity sum’) paid when the annuity ends. You can then use this lump sum however you wish (such as by looking at other pension options, e.g. buying another annuity or opening a drawdown scheme).
When you buy a fixed term annuity, you pay a lump sum in return for a regular retirement income. You can usually decide whether you receive income monthly, quarterly or annually. The income you receive will depend on
The money you pay for the annuity is invested by your provider at a fixed rate of growth. At the end of the annuity period, you will receive a maturity sum, which is your original investment plus growth, minus the income you’ve received in the meantime.
The amount of income paid to you directly affects the maturity sum you receive. So if you choose to have a lower annuity income, you’ll receive a higher maturity sum at the end.
If you die before your fixed term annuity ends, the rest of the money will usually be paid to a beneficiary of your choice. How this works will depend on your provider and the terms you’ve agreed between you. If you’re unsure, seek independent financial advice on this.
Any annuity payments you receive will be taxed in the same way as normal income. Remember however that you can take 25 per cent of your pension pot tax free, so you should do this before buying your annuity.
Fixed-term annuities are noted for their flexibility. You have control over many features such as:
When considering a fixed-term annuity, always shop around. A financial adviser can help you do this. Different providers will offer different rates, and the right choice can save you thousands of pounds over the longer term.
Fixed term annuity rates indicate how much you will receive each year for every £100,000 you invest. For example, if you are offered a rate of 5 per cent and you pay in £70,000, you will receive £3,500 a year (followed by the maturity sum at the end).
Once you’ve chosen your annuity, you can apply for it yourself through the provider or go through your financial adviser.
As with all investment products, fixed-term annuities do come with risks. Your independent financial adviser can recommend the best way to set up your income in retirement.
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